Enterprise-Based Public Finance: Blending the Old and the New
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PUBLIC CHOICE E POLITICAL ECONOMY I fondamenti positivi della teoria di finanza pubblica XXI Pavia, Università, 24-25 settembre 2009 CONFERENZA ENTERPRISE-BASED PUBLIC FINANCE: BLENDING THE OLD AND THE NEW GIUSEPPE EUSEPI and RICHARD E. WAGNER società italiana di economia pubblica dipartimento di economia pubblica e territoriale – università di Pavia Enterprise-based Public Finance: Blending the Old and the New Giuseppe Eusepi Department of Public Economics Sapienza University of Rome Via del Castro Laurenziano, 9 00161 Rome ITALY Email: [email protected] http://www.eco.uniroma1.it http://w3.uniroma1.it/ecspc/ and Richard E. Wagner Department of Economics, 3G4 George Mason University Fairfax, VA 22030 USA Email: [email protected] http://mason.gmu.edu/~rwagner Abstract This paper seeks to overcome a deep antinomy within the theory of public finance: while market outcomes are treated as resulting from polycentric competition, political outcomes are treated as resulting from hierarchic planning. We seek to overcome this antinomy by treating political outcomes as likewise resulting from polycentric competition, taking due account of relevant institutional differences. For example, a parliamentary assembly is treated as a peculiar form of investment bank: a parliament intermediates between the sponsors of enterprises and those within the citizenry who have means to support those enterprises. What results is a theory in which budgets emerge in largely bottom-up fashion through complex networks of exchanges. Much of the inspiration for this paper arises from the Italian School of Public Finance, particularly Giovanni Montemartini, Maffeo Pantaleoni and, in more general terms, Antonio De Viti de Marco. Keywords: political pricing, political-economic interaction, polycentric politics, economic calculation, emergence, spontaneous order, order vs. organization JEL Codes: D2, D7, H1, H7 This article was written under the aegis of the European Center for the Study of Public Choice while Richard E. Wagner was a visiting fellow at Sapienza University of Rome May-June 2009. Enterprise-based Public Finance: Blending the Old and the New There is a theoretical antinomy with respect to the treatment of polity and economy within the theory of public finance. Economy is treated as an order (Hayek 1973) which is organized through polycentric processes of competition. In contrast, polity is treated as an organization, a gigantic one to be sure, that imposes teleologically-guided planning onto what otherwise would have been market-generated outcomes. The relation between market and state is thus sequential, with state’s acting in light of given market outcomes. Our alternative research program seeks to eliminate this antinomy by treating polity from the same scholarly orientation as economists treat economy. As an order, polity contains many organizations within its precincts, and with those organizations interacting both among themselves and with various organizations organized within economy. The relation between market and state is thus simultaneous, with mutual interactions operating in both directions. While all organizations are oriented teleologically through plans, the resulting order emerges spontaneously through interaction among participants. Within polity there is no one organization that denotes polity, for polity is plural and not singular with respect to its organizational pattern. Neither a president nor a parliamentary assembly represent a polity but rather denote particular organizations within polity. For instance, we treat a parliamentary assembly as a peculiar form of investment bank that operates inside a polity: people come to a parliament to secure support for the enterprises they are sponsoring, and 2 parliament intermediates between the sponsors of those enterprises and those among the citizenry who have means to support those enterprises. That those who have the means are often forced investors is what makes parliament a peculiar and not a regular form of investment bank. This analytical framework treats budgetary configurations as emerging in largely bottom-up fashion through complex networks of transactions, in contrast to the typical top-down framework of contemporary political economy. The core of this theoretical effort entails dissolution of the theoretical antinomy within the orthodox model of political economy. It should be noted that this antinomy was recognized long ago in Paul Samuelson’s (1954)(1955) formulations of the theory of public goods, where he noted the institutional disjuncture between polity and economy. Subsequent work has not bridged that disjuncture but has evaded it through making claims about demand revelation. The most common evasion in this respect is the claim that an election selects the set of policies that maximizes utility for the median voter, as illustrated nicely by Persson and Tabellini (2000). Dissolution of this theoretical antinomy requires an alternative framework where both policy and economy contain numerous enterprises, each teleologically oriented, and that all such enterprises operate within a non-teleological order where organizational actions are framed by constitutive rules. The earlier portions of this paper explain the theoretical distinction between these alternative orientations toward political economy; the later portions explore some possible avenues for pursuing an integrated, order- based orientation toward the material of public finance. 3 Society as an Emergent and Entangled Ecology of Enterprises The conventional polarization leads theoretical thought astray by ignoring the ecological nature of human enterprise. A society contains an entangled set of enterprises, some commercial and others political. Those enterprises don’t operate independently of one another in separate ponds of activity. They are entangled in a complex human ecology. Prices emerge through commerce, which is possible only with alienable property. Economists study how alienable property promotes social cooperation through competition among commercial enterprises. Complex forms of social organization are made possible by the information that is created by the market prices that arise from commercial transactions. Those prices provide navigational aids that promote the growth of complex commercial ecologies. These could never have arisen without private property. If anyone doubts this, just compare South and North Korea now or West and East Germany 20 years ago. Market-based cooperation, however, is only part of the story of social cooperation. A complete story requires political enterprises to be brought into the picture. Suppose you stay at a resort and rent a boat at a nearby marina. These activities are organized by businesses. But you travel between the resort and the marina over roads that are built and maintained by governments. Moreover, the marina may be adjacent to the mouth of a river that requires dredging by some government agency to remain usable. Your activities rely upon cooperation and coordination throughout an array of enterprises, private and public. 4 Within the complexity of modern societies, that ecology must necessarily rest heavily on alienable private property. Hence, commercial enterprises occupy the foreground and political enterprises the background of a healthy social ecology. The value of a marina, and of commercial activity generally, is determined directly by the willingness of people to support the marina. The value of the highways and the dredging that support the marina, and of political activity generally, are subordinate to and derived from the desires for the marina. People don’t support dredging services for their own sake, but do so only in consequence of their desire to visit the marina; the demand for collective services is derived from the demand for market services. All theories of public finance treat the economy as a complex organism that is self-organized through interaction among people in the presence of private property. To say something like “the market works” is to engage in metaphorical and not material speech. There is no market that does anything. “Market” is an abstract noun that is used to denote processes of commercial interaction. When it comes to polity, however, fiscal theorists typically treat the state as some optimizing entity. This is the state as a mechanic who tunes the social engine.1 To be sure, the literature contains extensive debates over how competent the mechanic-state might actually be, but those debates occur within the presumed antinomy between polity and economy. The alternative orientation public finance that we pursue here rejects this antinomy by treating political entities as operating on the same plane as 1For presentations of this orientation, see Barzel (2002), Drazen (2000), and Persson and Tabellini (2000). 5 economic entities. The polity, just like the economy, contains multiple participants who differ both in what they know and in what they desire and yet who operate within the same social order. It is just as metaphorical to assert that the state does something as it is to assert that the market does something. What we denote as state activity, as with market activity, emerges out of complex patterns of interaction. Achieving Coordination: Pricing and Calculation in Political Economy The economic theory of markets treats only a subset of all economic relationships, those that are organized through private property and free exchange. We can use this theory to understand the coordinated network